Vodafone verdict to check inflows from tax havens: Experts

They said the verdict may help rein in treaty shopping, a mechanism used by large corporates to route investments through tax havens, say experts. Market analysts said, however, that private equity inflows and M&A deals by foreign companies involving Indian firms could be adversely impacted, as the court verdict is likely to weigh on overseas investors.

In a judgement that will have far-reaching implications on corporate deals, the court held that the Income Tax Department has the jurisdiction to claim dues from Vodafone on the USD 11 billion payment to Hutchison in 2007 for buying its assets, including those in India, even if the deal was signed outside the country. Although the judgement is expected to be challenged in the Supreme Court, it means a tax liability of about Rs 12,000 crore on Vodafone.

"The judgement will put a check on treaty shopping. It will only affect investments being routed through tax havens with a view to avoid payment of due taxes. The decision will not hurt genuine foreign direct investment from destinations like the US, Japan and other countries," said Diljeet Titus, senior partner of law firm Titus and Co. The I-T department has been maintaining that Hutchison made substantial gains through its investments in India, before selling out to Vodafone, and was liable to be taxed under the provisions of Income Tax Act 1961.

Senior advocate U K Chaudhury said, "The High Court order has correctly followed the established path of jurisdiction. Taxes are levied on two theories -- territorial jurisdiction and a reasonable nexus theory. In the present case, there is a reasonable nexus between the transaction on foreign soil and the levy of tax on the capital gain."

Commenting on the judgement, DSK Legal partner Balbir Singh Mastan said, "The judgement will have some bearing on FDI, as tax on onshore assets remain an issue with foreign companies. DTC (Direct Taxes Code) has created this provision (for) on-shore assets tax." He added, however, that the telecom industry will not be affected, as no FDI was likely to come in this sector. "Indian companies will consolidate now."

Titus said the corporates should not ignore the spirit of the Double Tax Avoidance Agreement (DTAA) while trying to route investments through tax havens. "If you are making money, you should pay tax... The DTAAs with countries like Mauritius are designed to help those nations and not to provide a route to corporates to evade taxes," he added.
Agreeing with the judgement that Vodafone is liable to pay tax on a deal struck overseas, Chaudhary said that domestic laws will apply even if the agreement is signed outside the country.

"For instance, the Takeover Code will trigger in India even if the shares are purchased outside the country," he added. Some market experts said the Vodafone case will make foreign firms cautious on India.

SMC Capitals Equity Head Jagannathan Thunuguntla said, "Private equity inflow will definitely come under pressure as the investor will have to be extra cautious before entering India. However, looking at the potential foreign firms see in India, the companies will just be cautious and would not shy away."

On the other hand, some analysts are of the opinion that foreign companies looking to park their money in India would have to chose the right way of making investments, especially in terms of clearing the regulatory hurdles.

Geojit BNP Paribas Assistant Vice-President Gaurang Shah said, "Vodafone's buy-out of HTIL (Hutch) was debatable since its onset which suggests that the potential
foreign investors will have to decide the suitable route to acquire or invest in India. "The firms will have to take due permissions from the local authorities and tax department in order to avoid any complication."

CNI Research CMD Kishore P Ostwal said the court ruling has not come as a surprise because the way Vodafone deal was structured, it had to come under the tax bracket.
Therefore, today's verdict would have no impact on foreign investments flowing into the country, he added.